In California, approximately
two-thirds of total payroll in the state has been covered for workers
compensation through insurance policies, while the remainder is through self-insurance.
There are more than 100 private for-profit insurers and one public nonprofit
insurer  the State Compensation Insurance Fund (SCIF).

These insurers are
overseen by the California Department of Insurance (CDI), whose mission is to

To accomplish its
principal objective of protecting insurance policy holders in the state, the
Department examines insurance companies to ensure that operations are consistent
with the requirements of the Insurance Code.

CDI plays a significant
role to conserve, rehabilitate or liquidate licensed California financially
distressed and insolvent insurance companies under appointment by the courts
in order to provide for a stable and consistent insurance market. The agencys
2001 Strategic Plan specifies that one of its particular goal is to "Minimize
financial insolvencies of insurers".

Minimum Rate
Law

Until a few years
ago, Californias workers compensation insurance rates were regulated
by the Insurance Commissioner under the minimum rate law passed in 1915. Under
this law, an insurer could not issue, renew or continue workers compensation
insurance at premium rates that were less than the rates approved by the Insurance
Commissioner. The Commissioner, through its statistical agent, the Workers
Compensation Insurance Rating Bureau (WCIRB), gathered and analyzed premium
and losses data, classified businesses, did actuarial projections, and determined
final, fully developed, premium rates that included all the costs of benefits
and administrative overhead. The final premium could be lower depending on the
dividends paid by insurers at the end of the policy period.

In 1993, the workers
compensation reform legislation repealed Californias 80-year-old minimum
rate law and replaced it beginning in 1995 with an open-competition system of
rate regulation in which insurers set their own rates based on "pure premium
advisory rates" developed by the WCIRB. These rates, approved by the Insurance
Commissioner and subject to annual adjustment, are based on historical loss
data for more than 500 job categories.

Under this open
rating system, these recommended, non-mandatory pure premium rates are
intended to cover the average costs of benefits and loss adjustment expenses
for all employers in an occupational class, and thus provide insurers with benchmarks
for pricing their policies. Insurers typically file rates that are intended
to cover other costs and expenses, including unallocated loss adjustment expenses.

Insurance Market
Before Reform

California workers
compensation direct written premium peaked at nearly $9 billion in 1993, the
same year the legislature enacted a major overhaul of the system. Adoption of
open rating, which took effect in January 1995, was a key provision of that
reform. However, beginning in mid-1993, prior to the conversion to open rating,
the legislature and the Insurance Commissioner approved a series of rate decreases.
The first, mandated by the Legislature, called for a reduction of 7% in workers
compensation rates. Then, with the state experiencing a major economic recession
and workers compensation claim frequency and claim costs declining for
the first time in years, the Insurance Commissioner followed the legislated
rate reduction with a 12.7% reduction in January 1994 and a 16% reduction in
October 1994, just before the minimum rate law was eliminated and open rating
took effect. As a result, by 1994, statewide premium was down to $7.7 billion,
and by 1995  the year open rating took effect  written premium was
already down to $5.7 billion  a decline of over 35 percent in 2 years.

Insurance Market
after Reform

Subsequent to the
repeal of the minimum rate law effective January 1995, changes were noted in
the actions of insurers and employers.

Price Competition

While declining
claim costs and the mandated premium rate reductions initiated the decline in
the total California workers compensation premium, open rating apparently
spurred competition among insurers seeking to retain or add to their market
share. Some insurers attempted to increase their market share by writing coverage
at low prices that eventually proved to be below loss costs. This deregulated
market kept premium rates near their historic lows throughout the latter half
of the 1990s, even though losses were no longer declining.

In addition, the
commercial market was able to solicit and quote public agencies for the first
time. Prior to open rating, a public agency could either insure with State Fund,
or self insure. Since so few public agencies were insured previously, the WCIRB
data on them was very scant and probably not representative, especially in urban
areas. This caused some significant under pricing, which led public agencies
especially schools to go back to full insurance.

Total premium volume
did begin to edge up after 1995, as Californias booming economy added
many new jobs, driving up covered payroll. By 1997, however, industry wide losses
exceeded premiums, and the situation for many insurers was deteriorating. As
the link between the price of insurance and loss costs became more and more
tenuous, some insurers left the state, others ceased writing workers compensation
or were merged or acquired by other carriers, and still others, including several
of the largest insurers in the state, became insolvent and had to be taken over
or supervised by the state. As a result, the workers compensation market
became much more concentrated than in the past, with only a few insurers - aside
from State Fund, mostly large, national carriers - accounting for the lions
share of statewide premium.

Changing Insurers

WCIRB identified
some trends in employers changing insurers pre and post open rating. WCIRB estimates
that before open rating, about 25% of California employers with experience-modifications
(x-mods) changed insurance carriers each year. Post open rating, about 35% of
the employers did so, and the first quarter of 2001 shows that half of the employers
changed carriers. It should be noted, however, that in many post open rating
cases employers had no choice but to change insurers as the market had deteriorated
to the point that many carriers  including several of the largest workers
compensation insurers in the state -- ceased to exist or stopped writing workers
compensation in California.

Reinsurance

After open rating,
many carriers shifted the risk of their workers compensation claims to
other insurance companies, some of whom were inexperienced with the California
workers compensation insurance market. According to Professor Aigner of
the University of California at Santa Barbara, and the Workers Compensation
Executive many carriers used reinsurance aggressively in order to mitigate the
risk of having to make large future payoffs. Backed by reinsurance treaties
that lowered the reinsurance level to $50,000 or less from the more typical
$500,000 to $1 million, some primary workers compensation carriers offered
extremely low rates that proved to be inadequate in the face of soaring losses.
Some reinsurance companies also sold off their risk to other reinsurers in a
process called "retrocession." During 1999, several major reinsurance
pools experienced financial difficulty and ceased operations.

Profitability
of Insurance Companies

Profitability of
insurance companies as measured by the National Association of Insurance Commissioners
decreased with deregulation. In the late 1980s, workers compensation insurers
in California had profit levels of nearly three times the national average.
With open rating, California insurers have lower than average profit margins,
and during the late 1990s had the lowest return in the nation. Several indicators
including those discussed below pointed to a decrease in the profitability of
the insurance industry.

Premiums

Immediately after
the reform and the elimination of the minimum rate law, in part from reasons
discussed above, workers compensation insurance premiums continued to
decline. The total written premium declined from a high of $8.9 billion in 1993
to a low of $5.7 billion ($5.1 billion net of deductible) in 1995. The written
premium grew slightly from 1996 to 1999 due to growth of insured payroll, an
increase in economic growth, movement from self-insurance to insurance and other
factors, rather than increased rates. But even with well over a million new
workers covered by the system, the total premium paid by employers remained
below the level seen at the beginning of the decade.

At the end of 1999,
the insurance commissioner approved an 18.5% pure premium rate increase for
2000 and the market began to harden after 5 years of open rating, though rates
remained less than two-thirds of the 1993 level. Since then, the market has
continued to firm, with the Insurance Commissioner approving a 10.1% increase
in the advisory rates for 2001, and a 10.2% increase for 2002. Rates continue
to move up, and with the expansion of covered payroll, the WCIRB estimates total
written premium will end up at or near its all-time high in 2001.

A chart showing
the California workers compensation written premium and a history of the
workers compensation pure premium advisory rates since the 1993 reforms
follows. Please note that these amounts are exclusive of dividends.

1994WCIRB recommendation: No change in pure premium rates.
Insurance Commissioner approved:
Two pure premium rate decreases: a decrease of 12.7% effective January
1, 1994 and a second decrease of 16% effective October 1, 1994.

1995WCIRB recommendation:
7.4% decrease from the pure premium rates that were in effect on January
1, 1994. Insurance Commissioner approved:
A total 18% decrease to the pure premium rates in effect on 1/1/94
was approved effective January 1, 1995 (including the already approved
16% decrease effective October 1, 1994).

1998WCIRB recommendation: The initial recommendation for a
1.4% decrease was later amended to a 0.5% increase. Insurance Commissioner approved: A 2.5% decrease effective
January 1, 1998.

1999WCIRB recommendation: The WCIRB initial recommendation
of a 3.6% pure premium rate increase for 1999 was later amended to
a recommendation for a 5.8% increase. Insurance Commissioner approved: No change in pure premium
rates for 1999.

2001WCIRB recommendation: The WCIRB initial recommendation
of a 5.5% increase in the pure premium rate was later amended to a
recommendation for a 10.1% increase.Insurance Commissioner approved: A 10.1% increase effective
January 1, 2001.

2002WCIRB recommendation: The WCIRB initial recommendation
of a 9% increase in the pure premium rate was later amended to a recommendation
for a 10.2% increase. WCIRB filed a mid-term recommendation that pure
premium rates be increased by 10.1% effective July 1, 2002 for new
and renewal policies with anniversary rating dates on of after July
1, 2002.Insurance Commissioner approved: A 10.2% increase effective
January 1, 2002. A decision is pending on mid-term increase request.

Combined Loss
and Expense Ratios

The accident year
combined loss and expense ratio, which measures workers compensation claims
payments and administrative expenses against earned premium has been increasing
greatly since 1993. In accident year 2000, insurers claim costs and expenses
amounted to $1.50 for every dollar of premium they collected  and that
was an improvement over the record high of $1.70 noted in 1999. In fact, the
ratios seen in the past 4 years (as shown in the graph below) are the highest
ever recorded by the industry since WCIRB began collecting data.

Combine
Loss and Expense Ratio

Source: Workers
Compensation Insurance Rating Bureau of California

Under-Reserving

Furthermore, a serious
under-reserving of claims was noted. As of December 31, 2000, the WCIRB estimated
that the amount of statewide reported reserves were $7.1 billion below the estimated
ultimate cost of incurred claims.

According to many,
these unprecedented results are explained, at least in part, by inadequate pricing
due to an extremely competitive insurance market. According to WCIRB, for most
of the second-half of the 1990s insurers were, on average, pricing their
policies well below the pure premium rate level. (Pure premium rates provide
only for losses and loss adjustment expenses and include no provision for other
insurer expenses.)

Average Claim
Costs

At the same time
that premiums and claim frequency were declining, the total amount insurers
paid on indemnity claims jumped sharply due to increases in the average cost
of an indemnity claim, which rose dramatically during the late 1990s. According
to the WCIRB, both average indemnity and medical claim costs have shown increases
over the last several years, as shown on the following graph.

Estimated Ultimate
Total Loss per Indemnity Claim by year
of accident as of september 30, 2001

Source: Workers Compensation Insurance Rating Bureau of California

The WCIRB predicts that the average
cost of a 2000 indemnity claim will be $38,397, which is a up 4% since 1999
and 100% since 1993.

Please note that
the WCIRBs estimates of average indemnity claim costs have not been indexed
to take into account wage increase and medical inflation.

Current
State of the Insurance Industry

Market Share

A number of California
insurers left the market or reduced their writings as a result of the decrease
in profitability, contributing to a major redistribution of market share among
insurers since 1993, as shown in the following chart. According to the Workers
Compensation Insurance Rating Bureau, California companies (excluding the State
Compensation Insurance Fund) insured seven percent of the California workers
compensation market in 2000, compared with 33% of the market in 1993.

The industry recent
problems in the reinsurance market caused by the events of September 11 have
significantly affected the cost and availability of catastrophe reinsurance
and, correspondingly, have a significant effect on the cost of workers' compensation
insurance. This extends to more than acts of terrorism and is a critical component
of any evaluation of the California workers compensation insurance marketplace.

Insurance Market Insolvency

Currently, several
insurance companies are experiencing problems with payment of claims. According
to WCIRB, fifteen independent insurer/insurer groups, which collectively wrote
over one-quarter of the total California market in 1994, are under regulatory
action by the Department of Insurance.

As indicated in
the following listing, Superior National and other insurance companies have
been liquidated while some insurance companies have been placed under regulatory
supervision by the Department of Insurance:

5. Reliance National Indemnity Company
group (under Pennsylvania liquidation), including

Reliance Insurance Company

United Pacific Insurance Company

Reliance National Insurance Company

Reliance National Indemnity Company

6. Sable Insurance Company (under
California liquidation)
Sable is a wholly owned subsidiary of Sable Insurance Holding
Company, which in turn is owned by Reliance National Indemnity Company

7. Frontier Pacific Insurance Company
(under California liquidation)
Frontier Pacific Insurance Company is part of the Frontier
Pacific Group whose stock ceased trading due to big losses.

8. PHICO Insurance Company (under
Pennsylvania liquidation)

9. Legion and Villanova Insurance
Companies (under Pennsylvania rehabilitation)
The companies are part of the Legion Insurance Group

Prevention of
Financial Insolvency

The American Insurance
Association cited several mechanisms already in place (listed below) that give
the Insurance Commissioner some tools to protect the solvency of the insurance
system. However, there are differing opinions as to the applicability and effectiveness
of these statutory and regulatory provisions relating to the Department of Insurance:

1. Authority
over the adequacy of the aggregate reserves of an insurer (Insurance Code
§§ 923.5 and 11558) and regulations that provide, in part, "The minimum
reserve requirements prescribed in Section 11558 shall be increased whenever
the Commissioner determines that the computations set forth in Section 11558
are inadequate as provided by Section 11557."

3. Authority
to require insurers to provide additional accounting or actuarial information
regarding its financial condition whenever the insurer appears to require
immediate regulatory attention. The additional accounting or actuarial supplementary
information may be at such intervals as the Commissioner may require and
must come from such accountants or actuaries as are satisfactory to the
Commissioner. (Insurance Code § 925)

4. Authority
to require an insurer to stop any conduct that would render the company
insolvent. (Insurance Code § 1065.1)

5. Insurance
Code §§ 739 et seq. provides an oversight mechanism, Risk-Based Capital
(RBC). RBC is a tool that allows the Department to review a number of critical
components of an insurers operations to determine whether its financial
condition warrants regulatory intervention.

6. Insurance
Code §11732 provides that: "(r)ates shall not, if continued in use,
tend to impair or threaten the solvency of an insurer or tend to create
a monopoly in the market." Some conclude that this only allows intervention
in the rates of an insurer when the insurer is faced with impending (if
not actual) insolvency. Others believe that the CDI does have significant
authority within the overall solvency regulation scheme in the Insurance
Code to allow early intervention in an insurer's rate making when its other
financial indicators, such as loss ratios, reserve adequacy, and loss development,
are adequately reviewed and analyzed.

Solutions to
Financial Insolvency

After a company
is determined to be financially distressed, the California Department of Insurance
conserves, rehabilitates or liquidates those licensed California insurance companies
under appointment by the courts. If the company is experiencing financial difficulties,
the California Department of Insurance can place the company under:

Regulatory
Supervision  The Insurance Commissioner issues an order to place
the company under oversight which involves a person from CDI monitoring
the companys distribution of assets. At this stage the company is
still operating itself.

Conservation
- The Commissioner applies to the Superior Court of California for a
conservation order to place a financially troubled company in conservatorship.
Under conservation, the Commissioner takes possession of all of the companys
books, records, property, and assets, and conducts, as conservator, the
business of that company as the commissioner sees appropriate. According
to Norris Clark, Chief of the Financial Surveillance Branch of the California
Department of Insurance, the standard for conservation includes failure
to provide the books and records for examination, operating in financially
hazardous conditions or being found to be insolvent (when a companys
minimum capital requirement is impaired).

When the Commissioner becomes
the conservator of a company, an investigation by the Conservation and Liquidation
Office (CLO) of CDI is initiated to determine if the company can be rehabilitated.
Every effort is made to enable the company to regain a strong financial footing.

Liquidation
- If it appears at the conservation stage or at a later time that the
company cannot be saved, then the Insurance Commissioner applies for a court
order to liquidate the company. When a liquidation order is issued, the
insurance company is closed and the process of selling the companys
remaining assets begins. The goal of liquidation is to use the money acquired
from selling the companys assets and from reinsurance and other collections
to pay off the companys debts and outstanding insurance claims.

California Insurance Guarantee
Association

Background

The California Insurance
Guarantee Association (CIGA) was established in 1969, in part, to meet the obligations
of insolvent workers compensation insurers by administering and disbursing
covered claims. Each insurer, in order to conduct business in the state, is
required to participate in CIGA, a fund from which insureds and claimants could
obtain financial and legal assistance in the event insurers became insolvent.

When an insurer
is declared insolvent, CIGA assures payments of claim liabilities. Unlike other
claims covered by CIGA, the insurance guarantee association pays 100 percent
of benefits on workers compensation claims. The valuation of each proof
of claim is determined in accordance with policy provisions and statutory requirements.

CIGA derives the
funds to pay claim liabilities through assessments levied against member companies,
through distributions from the estates of the insolvent insurers and investment
income. The insurers are then permitted to recoup their CIGA assessments by
surcharging their policyholders.

Between 1969 and
2000, CIGA reports that it paid out an average of $51 million per year. Prior
to September 2000, CIGA had a surplus of $290 million in its workers compensation
account.

Current Insolvencies

In its "Current
Situation Report" issued March 14, 2002, CIGA reports that it has been
in "precarious financial condition" since the Superior National Companies
were liquidated in September 2000. Since that time CIGA has paid out almost
$650 million on claims for those companies alone, and since October 2001, CIGA
has paid out $28 million to cover the insolvency of the Reliance Insurance Company.
This "has nearly exhausted CIGAs available cash to pay workers
compensation claims."

According to CIGA,
there are currently over 10 workers compensation insurance companies have
been liquidated since September 2000. CIGA's total cash drain from all current
insolvencies has grown to about $75 million per month, of which over $53 million
is for workers compensation.

Assessments and
Surcharges

In September 2001,California
Governor Gray Davis signed into law Assembly Bill 1183, which allowed CIGA to
raise the assessment on workers compensation insurers through September
12, 2002 from not more than 1 percent to not more than 2 percent of net direct
premiums written.

However, according
to CIGA, the short-term 2% assessment may not be enough to cover all claim liabilities.
At the current pay out rate, CIGA estimates that it will run out of funds for
workers compensation payments in April 2002.

In February 2002,
Assembly Bill 2007 (Calderon) was introduced which would establish the assessment
permanently at not more than 2% of net direct premiums written. A hearing on
AB 2002 is scheduled for May 1, 2002 before the Assembly Insurance Committee.

CHSWC Informal Hearing on the
State of the Workers Compensation Insurance Industry in California

The situations described
above and at the urging of the community, CHSWC held an informal hearing on
the state of the workers compensation insurance industry as part of its
February 8, 2002 meeting in San Francisco. Several representatives from throughout
the workers compensation community participated and shared their views,
including

CHSWC and the community
have expressed concerns regarding the current and future solvency of the California
insurance industry. The viability of the insurance industry is vital to maintaining
the health of the workers compensation system, which benefits both workers
and employers.

CHSWC recommends
that efforts be expended to:

 Stabilize
the workers compensation insurance market as soon as possible.
 Identify the impact of the insurance industrys current financial
crisis on the employers and employees.
 Determine the consequences of loss of competitiveness.

Further areas of study may include,
but are limited to, the following:

Possible Research Areas

1. Review and
assess the effectiveness of current regulations regarding the prevention
of and recovery from insurer insolvencies so that injured workers are assured
timely and proper benefits.

2. Explore whether
the California Department of Insurance (CDI) should move towards a "rate
adequacy" standard and whether this standard would be effective in
preventing insurance companies insolvencies.

3. Assess the
problems that the insurance industry is currently faced with and their impact
on timeliness of payments to injured workers.

4. Analyze other
states' approaches to improving competition through other methods such as
dispersal of information or verifying insurance coverage, and their applicability
to California.

5. Review the
recommendations of the Workers' Compensation Rate Study Commission and determine
their relevancy today.

6. Review the
literature on open rating and exclusive state funds.

7. Identify
key indicators to be utilized to conduct an ongoing evaluation of the insurance
industry to prevent future insolvencies and sustain the viability of a healthy
insurance market.

Summary of the
Proceedings of the Informal Hearing on the State of the Workers Compensation
Insurance Industry

On February 8th, 2002, the Commission
on Health and Safety and Workers Compensation held an informal public
discussion on Californias state of the workers compensation insurance
industry. Several representatives from the workers compensation community
presented their views on this issue. The following is a summary of these proceedings.

Michael Nolan,
President of the California Workers Compensation Institute

Mr. Nolan set the
stage for the hearing noting that there are diverse opinions about the issues
to be addressed at the Commission meeting regarding the state of the insurance
industry.

Mr. Nolan made several
points regarding current dynamics in the workers compensation insurance
market including:

· The September
11 World Trade Center attack resulted in increasing reinsurance rates for
carriers adding to the upward pricing pressure that employers already experienced
and affecting the availability of insurance for employers.

· Primary workers
compensation carriers with post September 11 reinsurance treaties now have
no reinsurance protection for terrorist acts. Also, the carriers have had
difficulties in securing coverage on other catastrophic events at reasonable
rates.

· At the present
time, insurers are faced with the issue of how to write insurance for terrorism.
In California workers compensation, the primary carrier does not exclude
such terrorism coverage for its employer. According to Mark Webb of the
American Insurance Association, a current bill before the US Congress would
provide a certain level of retention by the private marketplace, but also
have a catastrophic layer of coverage provided by the federal government.
This bill is modeled after a United Kingdom mechanism for terrorism insurance.

· The increase
in rates and the possible reduction in availability of insurance can lead
employers to increase the use of variety of approaches to reduce their workers
compensation costs. The different approaches can include: greater use of
self-insurance, group insurance, large deductibles. This could present various
regulatory oversight issues while regulatory budgets are declining.

Loss of value
of the securities market has decreased investment returns and Californias
return on net worth is at the lowest of any state as estimated by the National
Association of Insurance Commissioners (NAIC). Thus, it is questionable
whether California is able to obtain the capital to support the likely increase
in written premium resulting from 9/11 and AB 749.

· One of the
crucial issues facing California is the economic viability of CIGA, which
is the second largest workers compensation payer in the state, but
is currently insolvent on a book basis.

Mark Webb, Vice-President
of State Affairs for the American Insurance Association

Mr. Webb first addressed
economic factors that needed to be considered in explaining the transition from
the Minimum Rate Law to Open Rating Law. Mr. Webb commented that the drop in
premiums seen after open rating was due to an infusion of new capital. The capital
came from:

· Excessive
rates derived from the Minimum Rate Law in 1993 and 1994. The rates were
excessive because of the precipitous drop in claim frequencies. Also, the
Competitive Rating Law did not become effective until 1995. The convergence
of these two occurrences led to a large amount of capital being accumulated
during the transition period

· Managed care
organizations: After the creation of Health Care Organizations (HCOs) in
the workers compensation 1993 reforms, there was some thinking in
the HMO industry that acquiring workers compensation companies would
be a good investment.

· Availability
of relatively inexpensive reinsurance.

Mr. Webb commented
about the state of the insurance industry:

Although the
worst of the insurance industry crisis is over, the increase in the cost
of reinsurance and increase in benefit costs from pending legislation AB
749 could make the situation difficult for insurers. The pending legislation
which would extend the current level of surcharge by CIGA beyond the sunset
date will help the insurance market move in the right direction.

The Insurance
Commission has the authority to disapprove of rates that would tend to impair
the insurer or make it insolvent or rates that would tend to create a monopoly.
And for private carriers, a monopoly is presumed if an individual carrier
gets 20 percent or more of the marketplace. CDI feels that that does not
allow them to intervene in the rate-making process early enough to prevent
insolvencies.

· California
still has one of the most competitive workers compensation insurance
marketplace when examining how many carriers can come into the market under
proper insurance regulatory oversight. He noted that largely the domestic
industry has left the market, but there are still national companies in
the insurance market that are developing capital in California.

Mr. Mulryan spoke
about CIGA and its role in the current insolvencies in the insurance industry:

· CIGA is a
semi-public, involuntary association of property and casualty insurers which
was created in 1969 to pay claim liabilities in the event insurers became
insolvent.

· In the case
of workers compensation insurers CIGA has to pay 100% of the benefits.
CIGA assures payment of liabilities through assessments levied against member
companies, through distributions from the estates of the insolvent insurers
and investment income. Currently, CIGA is handling over 25% of California
workers compensation claims.

· CIGA in the
32 years since its creation has paid out an average of $51 million in claims
every year. However, since September 2000 it has paid out over $600 million
just for the Superior National insolvencies alone. Since then there were
additional insolvencies including Reliance, Sable Insurance Company, and
Credit General which have put large financial demands on CIGA.

· In
order to help meet its financial demands CIGA obtained an increase in its
assessment cap from 1% to 2% last year. However, in order to continue meeting
its financial demands CIGA needs to have the 2% surcharge reinstated beyond
the current sunset date and to have a regular flow of disbursements from
the estates.

· Currently,
CIGA has not been receiving distributions from Superior National Insurance
Companies estate, because a large part of the companies reinsurances
was tied up in one treaty which is currently in dispute.

· With
the extension of the surcharge and the current rate of payouts, CIGA projects
that by the end of this calendar year, it will be $219 million in the negative
in workers compensation on a cash basis. By the end of 2005, CIGA
will be in the black by $10 million dollars.

· Changing
the current deposit law would help in solving the problem of distribution
of the estates. At the present time, insurance companies securities are
not directly deposited into CIGA which has created a hold up of the deposits
by sureties. He commented that the law should be simplified to allow CIGA
to receive the deposits directly. This is being introduced into legislation
this year.

David Bellusci,
Vice President and Chief Actuary of the Workers Compensation Insurance
Rating Bureau of California

Mr. Bellusci made
a presentation on Workers Compensation Insurance Industry results. Several
indicators pointed to the financial difficulties that insurance companies have
been experiencing:

· The written
premium declined sharply for insurers before and into open rating in 1995
and flattening out for several years after. During the last couple of years,
the premium has grown due to pricing increases in the market. In general,
the premium has grown much slower than the cost side during periods of economic
growth.

· The rates
in the market were inadequate just before and after open rating. The insurers
should have been charging 20 to 25 percent above loss costs, approved by
the Commissioner, to take into account other financial expenses. Instead,
the insurers discounted significantly from loss costs. Although data for
the first 9 months of 2001 shows that the rates were higher than they were
at the start of open rating in 1995, the rates are still below their peak
in 1993.

· Although indemnity
claim frequency has been decreasing in the 90s and is continuing, the cost
of an average indemnity claim has increased.

· The combined
loss and expense ratios show that since open rating took effect in 1995
insurers are paying out substantially more than they are receiving in premiums.
However, due to price increases in 2000, the combined loss and expense ratio
is lower than in 1998 and 1999.

· The market
share for California workers compensation (excluding State Fund) insurers
between 1994 and 2001 has declined substantially while State Funds
share has grown from 19% to 31%. However, Mr. Bellusci noted that while
many companies have left the market, many other ones have entered and the
market is still competitive.

The WCIRBs
projections for the future include: a continued increase in insurance prices,
continuing growth of the State Funds market share, and possibility of
new entrants into the market attracted by higher rates.

Norris Clark,
Chief of the Financial Surveillance Branch of the California Department of Insurance

Mr. Clark and Mr.
White spoke about the current State of the Insurance Industry from the California
Department of Insurance (CDI) perspective. Mr. Clark noted that:

The financial
viability and profitability of the Insurance Industry is declining. In 1994
out of the top 20 companies writing workers compensation insurance
business, 11 companies were California domestics. In 2001, only 3 California
domestic companies wrote insurance.

At the present
time there are several financially troubled companies and very little new
capital entering the market place. In Mr. Clarks opinion, most of
the business has been increasingly going to fewer insurance groups and there
is diminishing competition in the marketplace.

Mr. White commented
on the deregulation of the state of the insurance industry, emphasizing that
the cause of the current financial situation of the insurance companies is open
rating.

Mr. White made several
points on the impact of law changes on CDIs regulation of insurers:

Under deregulation
the law was changed from " rates should be adequate for all admitted
insurers" (under Minimum Rate Law) to rates shall not tend to impair
or threaten the solvency of an insurer." This modification meant that
CDI could intervene only if a companys solvency was impaired even
if the insurer was losing money on its workers' compensation rates.

In the Minimum
Rate law only the workers compensation experience of a company could
be used to judge the adequacy of rates. After the new law was enacted in
1993, only if the workers compensation rates of a particular company
would cause that company to be insolvent for the entire company book of
business could CDI intervene.

Currently, the
Insurance Commissioner has financial solvency authority over companies,
but no authority over the market as a whole.

Pat Quintana,
Government Relations Officer for the State Compensation Insurance Fund

James Neary,
Vice President and Actuary of the State CompensationInsurance Fund

Ms. Quintana and
Mr. Neary made several remarks on the state of the industry from the State Compensation
Insurance Fund perspective.

Ms. Quintana spoke
about the history and the mission of State Fund.

· The State Fund was created
88 years ago under Governor Johnson.
· The mission and objectives of State Fund include:

o To be free and fairly
competitive with other insurance carriers

o To operate as a yardstick
for the industry to encourage fair rates for employers and fair treatment
for injured employees

She pointed out
the possibility that open rating might not have been the cause of the current
situation in the insurance industry. She commented that in 1915, under no open
rating laws, there were companies that had also gone into liquidation while
State Fund had prospered.

Ms. Quintana further
pointed out that State Fund has been necessary in the marketplace and its market
share has fluctuated over the years from 10 to 40 percent depending on economic
conditions and the situation in the workers compensation industry.

Mr. Neary pointed
out that:

· In the current
marketplace which is strained the State Funds role is to guarantee
availability and affordability of workers compensation insurance to
employers in California.

· As
prices in the marketplace increase, it will attract new entrants and a viable
private market will again reappear in California.

· State
Fund has managed to maintain a good record while many other insurers have
been taken over by the California Department of Insurance recently. The
ability of State Fund to maintain good financial health is due to the fact
that during open rating the State Funds price level was higher than
other insurance carrier and it was committed to strong reserves.

Mark Johnson,
Division of Workers Compensation Audit Unit

Mr. Johnson presented
a summary of the audit results for the last five years with indicators of claims
handling performances. Mr. Johnsons presentation showed that:

Approximately
8500 claims were audited in 1997 and 9600 claims in 2001

Total number of penalties assessed increased by 22% between 1997 and 2001

Average unpaid indemnity per claim has increased from $897 to $1,066 between
1997 and 2001

The frequency of late firsttemporary disability payments
in randomly selected claims increased from 21% to 30% during the same
period.

Frequency of violations for failure to issue routine benefit notices in
randomly selected claims increased from 24% to 30% between 1997 and 2001.

Frequency
of violations for failure to timely issue QME notices in randomly selected
claims increased from 18% to 21% between 1998 and 2001.

Frequency
of violations for failure to timely issue notices of vocational rehabilitation
eligibility in randomly selected claims increased from 48% to 58%

Frequency
of violations for Failure to Timely Pay or Object to Bills for Medical
Treatment in randomly selected claims increased from 12% in 1997 to 18%
in 1999 and decreased to 13% in 2000 and 2001.

Frequency
of violations for failure to timely pay or object to medical-legal bills
in randomly selected claims increased from 7% to 9%.

The frequency
differed between late payments of temporary disability and payments on
medical bills because in medical bills there was a larger time frame in
which to make the payment. Specifically, in temporary disability cases
there is only 14 days from the date of injury when the payment has to
me made. However, for the medical bills there is 60 days to make a payment
from the date the bill is received.

Glenn Shor, DWC
Policy, Program Evaluation and Training Unit

Mr. Shor first commented
on the recommendations made by the Workers Compensation Rate Study Commission
created by the Legislature in 1992 to study the rate system in workers
compensation. Mr. Shor noted that two of the recommendations of the Commission
were not adopted. These recommendations were:

· To abolish
the existing minimum rate law, replacing it by open competition with floor
rates approved by the Insurance Commissioner based on loss costs provided
by the Workers Compensation Insurance Rating Bureau.

· The Commissioner
of Insurance issue an annual report evaluating the state of competition
in the workers compensation insurance market. Mr. Shor mentioned that
such studies are done in several other states including Michigan and Maine,
which have made the transition to open rating.

Mr. Shor made several observations
about various innovations developed by states to improve competition, verify
coverage, and report illegally uninsured employers.

· The State of Missouri publishes
all workers compensation insurance premium rates by company and by
workers compensation classifications on their Department of Insurance
website.

· Texas has on their website
an ability to verify workers compensation coverage for an individual
employer.

· Florida has on their website
the ability to report an employer suspected of illegally failing to secure
workers compensation coverage for his/her employees.

Mr. Stein and Mr.
Wooley pointed out their concerns of how insurance insolvencies related to delays
in timely payments to injured workers. They commented that:

· Currently there are problems
in obtaining claim information which occurs when there is an insolvency
and CIGA takes over. There can be several weeks in delay of benefits to
injured workers when the file goes from the insolvent carrier to CIGA and
then to the company that is contracted to take over the administration of
the claim.

· There are delays in cases
of cumulative trauma where CIGA is involved. In such cases as long as CIGA
can find a solvent carrier connected to the case, CIGA no longer needs to
make payments. At the same time the solvent insurance carrier might be reticent
to accepting the case for various reasons which leads to delays.